GE Capital
Creating value through strategic sourcing
how-to
GE Capital
Strategic sourcing can be defined as an institutional sourcing and supplier management process that continuously improves and re-evaluates the supply chain activities of a company Its principal objectives are to: • Establish a consistent framework/approach to improving the quality, service and technology of goods and services consumed by an organization • Develop tools and capabilities that enhance visibility into the goods and services consumed
• Provide a single view across the enterprise of goods and services consumed • Develop standard agreements/templates • Create and deploy a framework/policy that addresses ongoing maintenance and monitoring of goods and services procured by the organization (e.g., procurement agreements compliance)
Creating value through strategic sourcing
how-to
2
GE Capital
In recent years, the macroeconomic environment has changed – supply bases are becoming more risky due to volatile input prices and increasing frequency of disruptions Commodity Prices Are Volatile & Unpredictable
Number of Bankruptcies in Supply Base Has Increased
Figure 13. Average annual world oil prices in three cases, 1980–2035 (2009 dollars per barrel) History
2009
Chapter 11
Projections
Chapter 7
250 High Oil Price
3,965
3,060
3,176
3,431
200
3,293
2,859
2,916 2,706
2,941 2,485
150
1,658
Reference
1,812 1,612
100 Low Oil Price
1,170
3,249
4,333
2,940
4,071
4,816
3,567
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
1,291 2,147
0
Q1 2006
1980
1995
2009
2020
5,420
Q4 2007
5,959
Q1 2008
7,043
Q2 2008
7,927
Q3 2008
8,872
Q4 2008
9,700
Q1 2009
10,675 10,798 10,604
Q2 2009
Q3 2009
Q4 2009
10,074 10,311
Q1 2010
Q2 2010
9,807
Q3 2010
9,293
Q4 2010
2035
Source: Corporate Executive Board, Zero Surprise Disruptions: Attract Early Intelligence on Suppliers’ Financial Health, Arlington, VA, 2009. Creating value through strategic sourcing
1,430
1,192
1,079
50
1,283
1,410
Source: Corporate Executive Board, Zero Surprise Disruptions: Attract Early Intelligence on Suppliers’ Financial Health, Arlington, VA, 2009. how-to
3
GE Capital
A stronger focus on developing supplier relationships is needed to manage risk resulting from macroeconomic changes and to capture efficiencies Allocation of Time Spent on Supply Management Activities 10%
Supplier Relationship Development
40%
Expediting
50%
Past
Creating value through strategic sourcing
50%
Collaborative Planning
30%
Supplier Relationship Development
10%
Expediting
10%
Order Processing/Tracking
Order Processing/Tracking
Future
how-to
4
GE Capital
Strategic sourcing is an iterative process that cuts costs and reduces risk, while building better relationships with fewer, more critical suppliers 1
Develop Commodity Profile
• Confirm user requirements • Develop category definition • Understand industry and supply markets
2
Generate Supplier Portfolio
• Identify quantified suppliers • Determine supplier valueadded capabilities • Develop supplier “short list”
Creating value through strategic sourcing
3
Develop Sourcing Strategy
4
• Assess bargaining position • Evaluate alternative strategies and value-added capabilities • Select appropriate approaches and techniques
Select Implementation Plan
5
Negotiate & Select Suppliers
6
• Select • Plan competitive vs. negotiation relationship strategy approach • Conduct • Verify and negotiations adjust sourcing with suppliers strategy with • Evaluate input supplier • Develop proposals implementation plan
7 Operationalize Agreements
Sustain the Results
• Plan transition to new suppliers • Implement new pricing on databases • Quantify suppliers (may extend timing)
• Monitor market conditions • Assess impact of new technology and best practices • Determine opportunities to reexamine process
how-to
5
GE Capital
An effective sourcing program turns the supply base into a source of competitive advantage by enabling a firm to gain access to scarce resources Firm gains access to resources = Becomes “Customer of Choice” What is a “Customer of Choice?”
Competitive Preference Your needs are consistently fulfilled by a supplier before competitors’ needs
A Customer of Choice is a company that consistently receives competitive preference for scarce resources across a critical mass of suppliers within its supply base
Scarce Resources Supplier-provided materials, services and ideas that are necessarily limited in availability
Critical Mass Beyond the small handful of strategic relationships, includes suppliers that support the entire range of business needs
Creating value through strategic sourcing
how-to
6
GE Capital
As strategic sourcing programs mature, the benefits extend beyond cost savings to breakthrough innovations and productivity improvements that drive revenue growth Evolution of a Strategic Sourcing Program
Strategic Contribution to the Firm
Cost Discipline in Supply/Demand Dimensions Buying, Leverage, Sourcing Excellence
Operational Efficiency
• Process orders • Bidding and negotiation • Expediting/tracing • Three-way matches • Price, delivery, quality
• Increase order efficiency • Plan volumes • Cost-manage flow • Leverage buying power • Systems integration and efficiency
Benefits Granted by Suppliers to Best-in-class Sourcers Allocation of Materials and Services in Short Supply Scarce Resource: Materials and/or services Customer of Choice Benefit: Business continuity
• Revenue emerges as an additional factor over cost savings • Influence supply market and inbound chain of flows • Influence demand and consumption management • Analyze and suggest opportunities and options to the firm • Access for the firm what it needs but does not have capital/time/ talent to develop on its own
Ideas and Technologies for Breakthrough Innovations Scarce Resource: New product or service technologies Customer of Choice Benefit: Revenue and margin enhancements
Resources for Productivity Improvement Scarce Resource: Supplier attention for identifying and implementing cost-saving opportunities Customer of Choice Benefit: Reduced prices and operating costs
Time
Creating value through strategic sourcing
how-to
7
GE Capital
Successful execution of a successful sourcing program depends upon hiring the right people, involving the procurement function early in the program, and managing suppliers effectively Tips 1
Hire the Right People
Description • The ideal sourcing manager has several competencies – acting as a strategist, relationship manager, and subject matter expert to extract maximum value from a sourcing program
2
Involve Procurement Early
• Involving procurement early on, i.e., prior to supplier selection, results in more cost savings from a sourcing program
Manage Suppliers Effectively
• Working collaboratively with suppliers, developing relationships, and managing contracts proactively drive greater value in a sourcing program
3
Creating value through strategic sourcing
how-to
8
GE Capital
Tip 1: Hire the right people – the ideal sourcing manager combines multiple competencies to drive business value 1 Strategist • Business acumen • Familiarity with “procurement toolkit” • Financial and market analysis • Creativity • Planning skills
Creating value through strategic sourcing
Subject Matter Expert
Relationship Manager
• Familiarity with specifications • Knowledge of value drivers • Understanding of market conditions • Understanding of technical/regulatory environment
• • • •
Credibility with stakeholders Active listening ability Consensus-building skills Influencing and interpersonal communication skills • Ability to challenge old beliefs and assert control
To sell transformative ideas, category managers need to maintain relationships and assert control
how-to
9
GE Capital
Tip 2: Early involvement of procurement underpins returns – involving procurement at the start of the process is key to maximizing value 2
WINNING
20%
LOSING Supplier Selection Line
16%
12% Pre-supplier Selection Maximizes Savings – Typically 10%-17%
8%
Post-supplier Selection Lowers Savings – Drop to 0%-5%
4%
0% • Budget review • Project identification • Market assessment Creating value through strategic sourcing
• Supplier identification • RFI/RFP
• Capabilities assessment • Supplier selection
• Contract negotiations and preparation
• Implementation
how-to
10
GE Capital
Tip 3: Greater value through supplier management – neglecting suppliers post-contract leads to a state of constant firefighting 3
Supplier Value Scenarios
Different Types of Supplier Management
ILLUSTRATIVE
1
Supplier collaboration to create new supplier value beyond what is in the contract
2
Supplier performance management to maintain and gradually improve value
Value
Contract Signed
Without rigorous contract management, 75% of sourcing savings can disappear within 18 months
3 Strategic Sourcing (Currently 60% of Procurement’s SupplierFocused Time)
Creating value through strategic sourcing
Not-so-benign neglect
Time
how-to
11
GE Capital
Key takeaways
Creating value through strategic sourcing
how-to
12
GE Capital
Key takeaways • Analyze and understand your current sourcing processes and procurement spend • Establish a consistent framework/approach to improving the quality, service and technology of goods and services consumed by your organization • Plan a sourcing strategy that turns the supply base into a source of competitive advantage
• Build a sourcing program by hiring the right people, involving the procurement function early on, and managing suppliers effectively • Create and deploy a framework/policy that addresses ongoing maintenance and monitoring of goods and services procured by the organization
Creating value through strategic sourcing
how-to
13
GE Capital
GE Capital (NYSE: GE) works on things that matter. GE Capital offers businesses and consumers around the globe an array of financial products and services. Providing more than money, GE Capital brings insight, knowledge and expertise to every loan and lease. Not just banking. Building. For more information, visit www.gecapital.com or follow company news via Twitter (@GECapital). Copyright © 2012 General Electric Capital Corporation. All rights reserved. This publication provides general information and should not be used or taken as business, financial, tax, accounting, legal or other advice. It has been prepared without regard to the circumstances and objectives of anyone who may review it; therefore, you should not rely on this publication in place of expert advice or the exercise of your independent judgment. The views expressed in this publication reflect those of the authors and contributors and not necessarily the views of General Electric Capital Corporation or any of its affiliates (together, “GE”). GE does not guarantee that the information contained in this publication is reliable, accurate, complete or current, and GE assumes no responsibility to update or amend the publication. GE makes no representation or warranties of any kind whatsoever regarding the contents of this publication, and accepts no liability of any kind for any loss or harm arising from the use of the information contained in this publication. “GE,” “General Electric Company,” “General Electric,” “General Electric Capital Corporation,” the GE Logo, and various other marks and logos used in this publication are registered trademarks, trade names and service marks of General Electric Company. You may not use, reproduce, or redistribute this publication, any part of this publication, or any trademark or trade name without the written permission of GE.
Creating value through strategic sourcing
how-to
14
